N. Korean currency crackdown fuels inflation, food shortages

TOKYO -- Strong-armed currency reform in North Korea, which has confiscated the savings of small businesses and forbidden the use of foreign money, is now causing runaway inflation and contributing to food shortages, according to several reports from inside the closed state.

Currency reform is part of an aggressive crackdown on free markets by North Korean leader Kim Jong Il.

His government has ordered the closure by the end of March of a large wholesale market in the northeastern port city of Chongjin, according to Good Friends, a Seoul-based aid group with a network of informants inside the country. Another major wholesale market near the capital, Pyongyang, was shut down in June.

After a decade of explosive growth, markets have substantially supplanted the central government as a means of employing and distributing food to North Korea's 23.5 million people. The kudzu-like spread of grass-roots capitalism -- and the government's inability to control it -- has angered Kim and his top lieutenants.

To hobble traders who acquire goods from neighboring China, the government has imposed controls on travel and lodging in border areas, ordered the public not to use the large suitcases that are popular with traders and increased punishment for illegal border crossing.

North Korea is "not moving toward a free-market economy, but will further strengthen the principle and order of social economic management," an official of the North Korean central bank recently told the Choson Sinbo, a Tokyo-based newspaper that is a mouthpiece for Kim's government.

But reining in the markets is a formidable task, even for North Korean authorities, who preside over what is often described as the world's most repressive police state. United Nations officials estimate that half the calories consumed in North Korea now come from food bought in private markets. Recent surveys of defectors have found that as many as 75 percent of them were involved in market activities before fleeing the country.

At the end of 2009, North Korea moved suddenly to wipe out the wealth of all those who had profited from market trading. It revalued the local currency, the won, while sharply restricting the amount of old won that could be traded for new. The rules, as first announced, made it illegal for citizens to possess more than $40 worth of local currency.

The revaluation triggered widespread anger and rare public protests. The government, as a result, eased exchange limits and increased cash payments to farmers and some workers, according to several accounts from inside the country.

Besides penalizing traders, an apparent goal of the currency revaluation was to slow inflation, which has plagued North Korea for years. But the government's action appears to have backfired, with potentially disastrous consequences in a country that is chronically short of food.

The black-market value of "new" won has reportedly plummeted against Chinese currency, spooking private traders, who have pulled their goods out of markets. Outside economists say suspicion about the value of the won has made residents wary, increasing economic stagnation and worsening food shortages.

The central government held a teleconference in late December with officials in every province, city and county "to discuss how to supply consumer goods to residents in the aftermath of the currency exchange," according to Good Friends.